Ipo Process

IPO PROCESS

PROJECT ONSTUDY OF INITIAL PUBLIC OFFERING PROCESS

FOR

Nuclear Power Corporation (India) Ltd.

Nuclear Power Corporation (India) LimitedOn Course and Ready…

The future lies here.

THE NEW AGE ANSWER TO INDIA’S ENERGY SECURITY,EMBLAZONING THE TRACKS, FOR BOUNDSLESS GROWTH

NUCLEAR ENERGY, VIABLE ENERGY

IPO PROCESS

PROJECT ONSTUDY OF INITIAL PUBLIC OFFERING PROCESS

FOR

Nuclear Power Corporation (India) Ltd.

A detail study done in

NUCLEAR POWER CORPORATION OF INDIA LTDSubmitted in partial fulfillment of the requirement for the award of degree of Master of

Management Studies (MMS) under Mumbai University.

Submitted byMr. SIDDHESH DALVI

Batch 2010-2012

Under the guidance ofMr. S.K SRIVASTAVA

ASST.GENERAL MANAGER (PFG, NPCIL)

SHRI YASHWANTRAO CHAVAN SHIKSHAN PRASARAK MANDAL’S

SINHGAD INSTITUTE OF BUSINESS MANAGEMENT

PLOT NO. 126, MHADA COLONY, CHANDIVALI,

MUMBAI – 400072


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Acknowledgment

Firstly, I would like to thank to my guide Mr S.K Srivastava for his continuous support throughout the project. I am indebted on account of his precious time, advice and guidance that helped me to complete this project. He used to clear our doubt and use to give me a bounty of information, which has helped me to enhance my knowledge base immensely. He taught me how the business runs and to tackle the management problems. He also taught me to think beyond the problem itself that helped me to become better in approaching a problem.

I would even like to thank Mr. M.K.Das and Mr. K.N. Babooraj who in spite of his busy schedule spared some time with me to clear our doubts. I extend my special thanks to Mr.Sandeep Pawar for their valuable co-operation and their support they gave me while going through the office files.

I would like to extend my special thanks to NPCIL for giving me an opportunity to work on this project which I consider a stepping stone in my career.

MR.SIDDHESH DALVI


IPO PROCESS

INTRODUCTION


IPO PROCESS

Nuclear Power Corporation of India limited.Nuclear power Corporation of India limited is a public sector enterprise wholly owned by the government of India. Under the administrative control of department of atomic energy. It has been registered in September 1987, under the companies act, 1956. with the objective of undertaking design, construction, operation and maintenance of nuclear power stations for the generation of electricity in pursuance of the schemes and programmes of the Government of India under the provisions of the Atomic Energy Act, 1962. In the year 2009-10, NPCIL produced 3% of India’s total electricity. It is planning to contribute a significant share in 63000 MW capacity by 2032 envisaged by the Integrated Energy Policy of Government of India.

Genesis of Atomic Energy in India

After India attained independence, in 1947, the Atomic Energy Commission was set up in 1948 for framing policies in respect of development of atomic energy in the country. The Department of Atomic Energy was established in 1954 with Dr. Bhabha as Secretary to implement the policies framed by the Atomic Energy Commission. Sir J.R.D Tata was one of the longest serving members in the Atomic Energy Commission and played a significant role in shaping the policies related to atomic energy program in the country. The atomic energy program, which was initiated in a modest manner initially, has now grown as a wide spectrum, multi dimensional multidisciplinary with 63 organizations under DAE. The spectrum of these significant activities include R&D in Nuclear Sciences and Engineering, Exploration & Mining of Radioisotopes, Nuclear energy development and implementation, application of Nuclear Energy, Bio-Agricultural Research, Medical Sciences etc. Atomic energy activities in the country are governed by the Atomic Energy Act. The commercial nuclear power program of the first stage (comprising of PHWRs and imported LWRs) is being implemented by Nuclear Power Corporation of India Limited (NPCIL), and the second stage ( comprising of Fast Breeder Reactors) by Bharatiya Nabhikiya Vidyut Nigam Limited (BHAVINI), both companies owned fully by the union government in accordance with the provisions of the act. In India, nuclear energy development began with the objectives of peaceful uses of atomic energy in improving the quality of life of the people and to achieve self-reliance in meeting the energy needs. The commercial Nuclear Power program, started in 1969 with the operation of TAPS 1&2 (BWR), currently shares about 3% country’s installed capacity. Thus playing a complementary role in meeting the country’s energy demand. However, in long term, it is expected to play a significant role in meeting the huge electricity demand of the country. Incidentally, India is not a very energy resource rich country. Currently, the India’s energy resource base status suggests the optimal mix of all the available energy resources to meet its growing demand of electricity which is projected to be about 800GWe by 2032 and 1300GWe by 2050.


IPO PROCESS

India's operating nuclear power reactors:

Major ActivitiesThe Mission of the Company is ‘To develop nuclear power technology and to produce nuclear power as a safe, environmentally benign and economically viable source of electrical energy to meet the increasing electricity needs of the country’.Objectives:- To maximize the power generation and profitability from the nuclear power station with the motto of” safety first and production next”.

To increase the nuclear power generation capabilities in the country, consistent with available resources in a safe, economical and rapid manner in keeping with the growth of energy demand in the country.

Treasury Management and Resource Mobilization in NPCIL

To continue and strengthen the quality assurance activities relating to the nuclear power program within the organization and those associated with it. To develop the personnel at all level through an appropriate human resource development program (HRD). In the organization with the view to further improve their skills and performance consistent with the high technology.


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To continue and strengthen the environmental protection measure relating to nuclear power generation.

To continue and strengthen the public awareness program for enhancing and improving the public perception of nuclear power in the country.

To share the appropriate technological skills and expertise at national and international level.

To bring about modernization and technological innovation in activities.

To coordinate and endeavor to keep the sustained association with the other units of DAE


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IPO PROCESS

What is Finance?Finance is the set of activities dealing with the management of funds. More specifically, it is the decision of collection and use of funds. It is a branch of economics that studies the management of money and other assets.

Finance is also the science and art of determining if the funds of an organization are being used properly. Through financial analysis, companies and businesses can take decisions and corrective actions towards the sources of income and the expenses and investments that need to be made in order to stay competitive.

Finance is nerve centre of business. Any business organization can finance its business using two options equity and debt. Mix of financing sources is need of any organization. Even though one chooses debt over equity in some instances to satisfy some interest parties’ equity must be used. Though debt is cheaper it is more risky. Because there is an obligation to pay back the interest on debt and debt amount irrespective of making profit or loss. But dividends to equity shareholders will be distributed only in case of profit. Raising huge capital is not possible only by going for debt. By going for equity not only firm raises huge amount of capital in short period of time but also they can spread there risk of business. The market value of equity rises if business is doing well and has robust future outlook. This leads to the promoter holding also multiplying in value though it is notional to a great extent. In times of need the promoter can sell part stake in the business by offloading 5-10% equity to raise cash. These cannot be said in case of debt. Hence equity is better than debt.


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An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue (common or preferred), best offering price and time to bring it to market.IPOs is an significant milestone in life of a company, it could have several implications such as following:

It can be source of finance if it is meant to be finance a specific end use. It creates a new ownership opportunities called retail window and class of investors

called retail investors. It can be a liquidity event since its creates an exit route for existing and future

investors of the company. It creates market capitalization for the company, which is the aggregate value of all

its issued shares as multiplied by the current market price. The market capitalization of the company can act both as an enhancement or deterrent

for future fund raising by the company in equity route. Being listed can open up the gates for hostile takeover attempts on the company. It makes future acquisition of stakes in the company by the promoters quite expensive

and cumbersome. It brings with it additional costs of regulatory compliance ,certain restrictions on

future capital transactions and cumbersome procedures.

An IPO can be explained in more simple manner is an issue , which an issuer or a company proposes to the public in the form of ordinary stock or shares. They are generally offered by new and medium sized firms looking for funds to grow. However, it can be done by big privately-owned firms seeking to transform themselves into an openly traded firm.

The government of India has been playing proactive role in the real estate market by the commencement of the In an IPO the company may procure the support of the countersigned enterprise, which assists in establishing what kind of security to issue, competitive offering cost and the period in which it should be launched in market. An IPO can be an unsafe venture for it is tough for an investor to predict how the stock or share will perform on its first trading day and afterwards. Moreover, the historical information available with the company is not sufficient enough to analyze the performance of the stock in Indian market.

Most IPOs are of the firms that are undergoing through momentary growth duration, and they are hence entitled to auxiliary vagueness related to their future performance. While IPOs are effectual at raising revenues, being cataloged at a stock exchange demands immense authoritarian observance and treatment needs.

The Initial Public Offering assumes that the firm is a significant market presence, is flourishing and has the obligatory past record to raise assets in public equity market. If the firm later trades recently tendered shares once again to the equity market, it is known as seasoned equity offering. When an investor trades shares, it is referred to as secondary


IPO PROCESS

offering and the investor and not the firm that has initially proposed the shares, maintains the advances of the offering. These phases are usually perplexes and only a firm which proposes a share can indulge in chief offering or the IPOs. Secondary offering takes place in a secondary equity market, where investors and not the firm purchase and trade from one another.

How IPO in India works?

The IPO method begins when the business lodges a registration declaration in accordance with SEC and as per the Securities Act of 1933. The SEC then studies the listing declaration and supports the entire revelation. The sponsor then proposes a prelude brochure and then an authorized catalog prior to the share offering. After the SEC endorsement, the value and time of the IPO are determined. As investing in an IPO is an uncertain and tentative endowment, only active merchants relying on their endowment motives and risk forbearance, should opt for such kind of endowment.

Applying for an IPO.

When a firm proposes a public issue or IPO, it offers forms for submission to be filled by the shareholders. Public shares can be bought for a limited period only and as per the law, any IPO should be traded openly only for minimum 3 days and 21 days maximum. For offers that are sponsored by financial institutions, the proposal should be traded for maximum 21 days and minimum 3 days.

For offers that are sponsored by India financial institutions, the proposal should be traded for maximum 10 days. The submission form should be duly filled up and submitted by cash, cheque or DD prior to the closing date, in accordance with the guidelines mentioned in the form. IPO's by investment firms generally entail countersigned charges which signify a load to purchasers.

Things to considered while applying for IPO in IndiaThere are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India. They are:

Promoters, their reliability and past records Firm producing or facilitating services Product offered by the firm and its potential Whether the firm has entered into a collaboration with technological firm Status of the associates Historical record of the firm providing the Initial Public Offerings Project value and various techniques of sponsoring the plan Productivity estimates of the project Risk aspects engaged in the execution of the plan Authority that has reviewed the plan


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KEY ELIGIBILITY CRITERIA

NO ISSUER SHALL MAKE A PUBLIC ISSUE OF SPECIFIED SECURITIES:

If the issuer, any of its promoters, promoters group or directors or person in control of the issuer are debarred from accessing the capital market by the board.

If any of the promoters, directors or persons in control of the issuer was or also is a promoters, director or person in control of any other company which is debarred from accessing the capital market under any order or directions made by the board.

If the issuer of convertible debt instruments is in the list of willful defaulters published by the reserve bank of India or it is in the default of payment of interest or repayment of principal amount in the respect of debt instruments issued by it to public, if any, for a period of more than six months.

Unless firm arrangements of finance through verifiable means towards 75% of the stated means of finance ,excluding the amount to be raised through the proposed public issue or through existing identifiable internal accruals, have been made.

Unless all existing partly shares have been made fully paid or fortified. If there are any outstanding convertible securities or any other right which would

entitle any person with any option to receive equity shares unless there are fully paid up outstanding convertible securities which are required to be converted on or before the date of filing of the red herring prospectus.

Other eligibility criteria

Three year track record of: Minimum net worth of rs. 1 crore. Net tangible assets of rs.3 crore, of which not more than 50% is held in monetary

assets. Track record of distributable profits in three out of last 5 years.

50% of revenues from activity suggested by the company’s name, if the issuer has changed its name in last 1 year ,and

Aggregate of proposed issue & previous issues in same year < 5 times pre-issue networth at the beginning of the year.

If above are satisfied , both fixed price and book built route can be adopted. If any of the conditions are not met


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Issue has to be through book- building process with minimum of 50% allotment to QIBS or project has 15% participation by FIIs/ banks with 10 % appraising agency + 10 % from QIBs and

Minimum post issue capital to be rs. 10 crores or compulsory market making for 2 years from listing.

Minimum issue size

Securities contracts ( regulations) rules: At least 25% of each class or kind of equity shares or debentures convertible into

equity shares to be offered and allotted to the public or At least 10% each class or kind shares or debentures convertible into equity shares to

be offered and allotted to the public if post issue capital at offer price is > RS 4000 crores provided: company shall increase public shareholding to 25 % by increasing its public shareholding by at least 5 % per annum beginning from date of listing.

Lock-in

20% of post issue paid up capital is to be held by the promoters which will be locked in for three years ( pledged shares not allowed ). The balance pre issue share capital locked in for one year.

Pre issue shares held by sebi registered vcf/ fvci/ will not be locked in if held for atleast 1 year as on date of filing of drhp. It will however be subject to provisions ,if any ,in sebi venture capital fund regulations.

Pre issue share capital issued to employees pursuant to esop/esos scheme will also be exempted from lock in period subject to certain compliances.

Inter-se promoter (including new promoter) transfers allowed subject to sast regulations.

Transfer between pre- ipo shareholders allowed, subject to sast regulations.


IPO PROCESS

Indicative Ipo TimelineEstimated time required to complete a task of initial public offer is t+180 days .These timeliness estimation is depended on preparedness of the company, market sentiments (primary and secondary) & SEBI and Stock exchange clearance.

T: TRIGGER DATE

Ipo timeline:

T ………….Board meeting to approve issue.

T+ 5 days ….kick off meeting.

T+10 days …….research presentation.

.

T+ 60 days ……Due diligence and drafting.

T+ 61 days…….Last date for research report.

T+62 days …….File DRHP with SEBI.

.

T +122 days……Receive SEBI comments on DHRP.

T+129 days …….Incorporate SEBI comments on DHRP.

T+ 130 days…….File RHP with SEBI.

T+ 145 days……receive SEBI approval to RHP.

T+ 146 days …...File RHP with registrar of companies.

T+ 161 days …..Roadshows.

T+ 162 days …..Anchor investors.

T+ 163 days….Issue opens.


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T+ 168 days……Issue closes.

T+ 177 days……Allotment.

T+ 180 days……..Transfer funds from public issue A\c to company A\c

# Price band to be announced at atleast two working days before the opening of the bid.

.


IPO PROCESS

List of IPO documents and responsibility.


IPO PROCESS

Sr.no Document Responsibility

1 Memorandum on publicity restrictions research report guidelines .

Underwriters’ legal counsel.

2 Power of attorney signed by directors for signing the DHRP, RHP and final prospectus on their behalf.

Company, company’s legal counsel, underwriter.

3 Engagement letter between company and lead managers.

Company, underwriters, underwriters’s legal counsel.

4 MOU between company and lead managers.

Company, underwriters, underwriters’s legal counsel, company’s legal counsel.

5 Tripartite agreements between company, registrar and the depositories.

Company, registrar and depositories

6 MOU between company and registrar.

Company, registrar, company’s legal counsel, underwriters.

7 Filings if any, with FIPB/RBI/IRDA.

Company, company’s legal counsel.

8 Board and shareholders’ approval

Company

9 Lender and third party consent. Company, company’s legal counsel.


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10 Comfort letter Auditor, underwriter’s legal counsel

11 Standard certificates for due diligence and SEBI filling.

Company, underwriters, underwriters’s legal counsel, company’s legal counsel.

12 Legal opinion from company’s Indian counsel.

Company’s legal counsel.

13 Legal opinion from underwriters‘s legal counsel

Underwriter’s legal counsel

14 Draft of legal opinions from underwriters’ legal counsel and company’s legal counsel.

Underwriter’s legal counsel, company’s legal counsel.


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Critical path timeline

1. Kick off:

Appointment of legal counsels.

Launch presentation.

2. Research:

Formulation of business plan.

Presentation / briefing to research team.

Circulation of research and advertising guidelines.

3. SEBI filing:

Compliance with corporate governance requirement.

Appointment of ad agency, registrar and printers.

Offer document finalization.

Completion of due diligence.


IPO PROCESS

Documentation /agreement closure.

4. Transaction launch:

In principle approvals from stock exchanges.

SEBI approvals.

Filing updated DRHP with sebi.

Filing of RHP with ROC.

Pre-marketing feedback.

Printing of RHP and bid- cum application forms .

Advertising campaigns.

Road shows.

5.listing:

Bidding .

Pricing.

Allocation.

Refund.

Listing approval from stock exchanges.


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KEY CONCEPTS


IPO PROCESS

WHAT IS IPO GRADING?

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

I am an issuer. By when am I required to obtain the grade for the IPO?

IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO.

Further information regarding the grading process may be obtained from the Credit Rating Agencies.

Who bears the cost of the IPO grading process?


IPO PROCESS

The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO.

Is grading optional?

No, IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA.

Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

Will IPO grading delay the process of issue?

IPO grading is intended to run parallel to the filing of offer document with SEBI and the consequent issuance of observations. Since issuance of observation by SEBI and the grading process, function independently, IPO grading is not expected to delay the issue process.

What are the factors that are evaluated to assess the fundamentals of the issue while arriving at the IPO grade?

The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the company’s financial position.

While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade

Business Prospects and Competitive Position

i. Industry Prospects


IPO PROCESS

ii. Company Prospects

Financial Position Management Quality Corporate Governance Practices Compliance and Litigation History New Projects—Risks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.

Does IPO grading consider the price at which the shares are offered in the issue?

No. IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO.

Where can I find the grades obtained for the IPO and details of the grading process?

All grades obtained for the IPO along with a description of the grades can be found in the Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer company is making advertisement for its issue. Further the Grading letter of the Credit Rating Agency which contains the detailed rationale for assigning the particular grade will be included among the Material Documents available for Inspection.

Does an IPO grade, which indicates ‘above average or strong fundamentals’ mean I could subscribe safely to the issue?

An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to the IPO or not. IPO grade needs to be read together with the disclosures made in the prospectus including the risk factors as well as the price at which the shares are offered in the issue.

How do I interpret the IPO Grades?

The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade 5.The meaning of these grades have been explained under Question 1 in this FAQ.

How does IPO Grading help in deciding about investing in an IPO?


IPO PROCESS

IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully.

What is the role of SEBI in IPO grading exercise?

SEBI does not play any role in the assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that agency.

Will IPO Grading given by CRAs be a parameter for SEBI to issue its observations?

The grading is intended to be an independent and unbiased opinion of a rating agency. SEBI does not pass any judgment on the quality of the issuer company. SEBI’s observations on the IPO document are entirely independent of the IPO grading process or the grades received by the company.

Which credit rating agencies are registered with SEBI?

As on date the following four credit rating agencies are registered with SEBI.

a) Credit Analysis & Research Ltd (CARE)

http://www.careratings.com/

4th Floor, Godrej Coliseum,

Somaiya Hospital Road ,

Off Eastern Express Highway ,

Sion (East),

Mumbai 400 022.

b) ICRA Limited


http://www.careratings.com/

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http://icra.in/

1105, Kailash Building 11th Floor,

26,Kasturba Gandhi Marg

New Delhi-110 001

c) CRISIL

www.crisil.com/

CRISIL House

121-122 Andheri Kurla Road

Andheri (East)

Mumbai – 400093

d) FITCH Ratings

http://www.fitchindia.com/

Fitch ratings India (P) Limited

Apeejay House, 6th Floor

3, Dinshaw Vachha Road,

Churchgate, Mumbai 400 020


http://www.fitchindia.com/

http://www.crisil.com/

http://icra.in/

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Due Diligence

During the due diligence phase, the company, its underwriters, and their attorneys will focus on the registration statement. This phase will require the company to thoroughly review its business and to substantiate all claims in the registration statement. For example, if a company claims that it "will have significant first-mover and time-to-market advantages as a software-based solution in the Internet postage market," the company must be able to back up that claim. Indeed, the Securities and Exchange Commission may ask for such data. This review may also uncover additional information that needs to be addressed or disclosed.

Besides inspecting the registration statement, the underwriters and counsel for both parties will also question company officers and key employees. This will include a thorough discussion of the company's business and marketing plans, revenue projections, product development road map, and intellectual property portfolio, with an emphasis on identifying potential pitfalls. The due diligence team will also speak with third parties, such as customers, retailers, and suppliers. After all, problems with partners in the supply and distribution chain can cascade back to the company itself. For example, a financially troubled customer may tie up a company's inventory in a bankruptcy court proceeding, or a supplier of a key component may face an extended shutdown as it irons out Y2K-related problems with its factory automation software.

The third leg of the due diligence review involves an audit of company records. Again, the team will be looking for hidden problems in the company's corporate documents, licenses, and material contracts.

Finally, the company and its employees should be sensitive to personal matters that may affect an initial public offering. For example, a confidential settlement between a senior executive and a plaintiff for a fraud-related case, even if it had no merits, may affect public perception of the company and its leadership. Accordingly, a frank discussion with counsel is encouraged.


IPO PROCESS

BOOK BUILDING PROCESS

BOOK BUILDING PROCESS is the most popular and coveted process all over the globe through which companies float their IPOs in the primary market. Final price of the IPO gets discovered only after the bidding process and hence is not prefixed.

Introduction

Initial Public Offerings are issued to the primary market in various ways among which the most popular one is through book building process. This process utilizes the market forces for price discovery of the IPO.

Book Building IPO - In a Nutshell

According to the Book building method, the IPO issuing company doesn't fix the price in advance, rather gives a price band to the investors within which they are entitled to bid. The investors, in turn, bid for the same by stating the quantity as well as the price of the IPO shares at which they are interested to purchase. IPO's final price is then determined on the basis of all the bid prices.

Participants of Book Building IPO

Institutional Investors Foreign Institutional Investors (FIIs) and MFs (Mutual Funds)

HNI (High Networth Individuals) These individuals buy IPOs at large quantities.

Retail Investors These are the common investors whose maximum investment limit is Rs. 50,000.

Process of Book Building IPOA company issuing an IPO through book building method follows the following steps:

A leading merchant banker is nominated by the IPO issuing company for book building, known as Book-Runner.

The concerned company then announces the total number of IPO shares that it is willing to issue along with the price range/band.

Investors are then allowed to bid for these issued shares for a limited time period. Investors place their preferences (that is, quantity and price of IPO shares) through a broker. brokers place these bids/orders on behalf of their clients through the electronic media into an

electronic book where they are stored. These stored bids are henceforth evaluated by the merchant banker along with the IPO

issuing company on the basis of certain criteria such as earliness of bid, aggression of price, quality of investor and many more.


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A cut-off price is then decided by accepting the lowest price at which all the IPO securities can be disposed off.

IPOs are then allotted to those investors whose bid prices are above the cut-off mark until the IPO shares get exhausted.

Conclusion Book building method is considered more transparent and market determined than the fixed price IPOs. Here the IPO issuing price is not pre-determined and is discovered only after the closing of bidding period. That is why book building is the most popular method to the companies for issuing their IPOs to the primary market all through the world.


IPO PROCESS

Green shoe Options: An IPO's Best Friend

Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial share prices. One of these ways is through a legal mechanism called the green shoe option. A green shoe is a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. The investment banks and brokerage agencies (the underwriters) that take part in the green shoe process have the ability to exercise this option if public demand for the shares exceeds expectations and the stock trades above the offering price.

The Origin of the Green shoeThe term "green shoe" came from the Green Shoe Manufacturing Company (now called Stride Rite Corporation), founded in 1919. It was the first company to implement the green shoe clause into their underwriting agreement.

In a company prospectus, the legal term for the green shoe is "over-allotment option", because in addition to the shares originally offered, shares are set aside for underwriters. This type of option is the only means permitted by the Securities and Exchange Commission (SEC) for an underwriter to legally stabilize the price of a new issue after the offering price has been determined. The SEC introduced this option in order to enhance the efficiency and competitiveness of the fundraising process for IPOs.

Price StabilizationThis is how a green shoe option works:

The underwriter works as a liaison (like a dealer), finding buyers for the shares that their client is offering.

A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients).

When the price is determined, the shares are ready to publicly trade. The underwriter has to ensure that these shares do not trade below the offering price.

If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the green shoe option.In order to keep the price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company.

For example, if a company decides to publicly sell 1 million shares, the underwriters (or "stabilizers") can exercise their green shoe option and sell 1.15 million shares. When the


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shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand. If the market price of the shares exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the green shoe option is useful: it allows the underwriters to buy back the shares at the offering price, thus protecting them from the loss.

If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender (issuer).

Full, Partial and Reverse Green shoesThe number of shares the underwriter buys back determines if they will exercise a partial green shoe or a full green shoe. A partial green shoe is when underwriters are only able to buy back some shares before the price of the shares increases. A full green shoe occurs when they are unable to buy back any shares before the price goes higher. At this point, the underwriter needs to exercise the full option and buy at the offering price. The option can be exercised any time throughout the first 30 days of IPO trading.

There is also the reverse green shoe option. This option has the same effect on the price of the shares as the regular green shoe option, but instead of buying the shares, the underwriter is allowed to sell shares back to the issuer. If the share price falls below the offering price, the underwriter can buy shares in the open market and sell them back to the issuer.

The Green shoe Option in ActionIt is very common for companies to offer the green shoe option in their underwriting agreement. For example, the Esso unit of Exxon Mobil Corporation (NYSE:XOM) sold an additional 84.58 million shares during its initial public offering, because investors placed orders to buy 475.5 million shares when Esso had initially offered only 161.9 million shares. The company took this step because the demand surpassed their share supply by two-times the initial amount.

Another example is the Tata Steel Company, which was able to raise $150 million by selling additional securities through the green shoe option.

ConclusionOne of the benefits of using the green shoe is its ability to reduce risk for the company issuing the shares. It allows the underwriter to have buying power in order to cover their short position when a stock price falls, without the risk of having to buy stock if the price rises. In return, this helps keep the share price stable, which positively affects both the issuers and


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investors.

ACCOUNT SUPPORTED BY BLOCKED AMOUNT (ASBA)

Application supported by blocked amount (ASBA) is a new investor-friendly way to apply for initial public offerings (IPOs). ASBA is an interface for banks to participate in the process of IPO payments as proposed by the capital markets regulator, the Securities and Exchange Board of India (SEBI). The objective of introducing ASBA is to ensure an investor's funds leave his bank account only on allotment of shares in public issues.

The ASBA process also ensures that only the required amount of funds is debited to the investor's bank account on allotment of shares. In this mechanism, the need for refunds is completely obviated. The banks participating in an IPO process can upload the bids with respect to their customers into the electronic books of BSE and NSE. The interface facilitates not only the controlling branch but also the designated branches of the banks to directly upload the bids into the electronic books.

ASBA provides an alternative mode of payment in issues whereby the application money remains in the investor's account till finalization of basis of allotment in the issue. The process facilitates individual investors bidding at cut-off, with single option, to apply through self-certified syndicate banks (SCSBs), in which the investors have accounts. SCSBs are banks that meet the conditions laid down by SEBI.

Role of SCSBAccept application

Verify application

Block funds to the extent of bid payment amount

Upload the details on the web-based bidding system of the exchange

Unblock once the basis of allotment is finalized

Transfer the amount for allotted shares to the issuer

This will co-exist with the current procedure of investors applying through sub-syndicate and syndicate members, with a cheque as a payment instrument. The ASBA is an application containing an authorization to block the application money in the bank account to subscribe to an issue. If an investor is applying through ASBA, his application money will be debited from the bank account only if his application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn.


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Draft red herring prospectus

A company making a public issue of securities has to file a Draft Red Herring Prospectus with Sebi through an eligible merchant banker prior to filing a prospectus with the Registrar of Companies.

What is Draft Red Herring Prospectus?

A company making a public issue of securities has to file a Draft Red Herring Prospectus (DRHP) with capital market regulator Securities and Exchange Board of India, or Sebi, through an eligible merchant banker prior to the filing of prospectus with the Registrar of Companies (RoCs).

The issuer company engages a Sebi registered merchant banker to prepare the offer document. Besides due diligence in preparing the offer document, the merchant banker is also responsible for ensuring legal compliance. The merchant banker facilitates the issue in reaching the prospective investors by marketing the same.

Where is DRHP available?

The offer documents of public issues are available on the websites of merchant bankers and stock exchanges. It is also available on the Sebi website under 'Offer Documents' section along with its status of processing. The company is also required to make a public announcement about the filing in English, Hindi and in regional language newspapers. In case, investors notice any inaccurate or incomplete information in the offer document, they may send their complaint to the merchant banker and / or to Sebi.

What does SEBI do with the DRHP?

The Indian regulatory framework is based on a disclosure regime. Sebi reviews the draft offer document and may issue observations with a view to ensure that adequate disclosures are made by the issuer company/merchant bankers in the offer document to enable investors to make an informed investment decision in the issue. It must be clearly understood that Sebi does not 'vet' and 'approve' the offer document.

Also, Sebi does not recommend the shares or guarantee the accuracy or adequacy of DRHP. Sebi's observations on the draft offer document are forwarded to the merchant banker, who incorporates the necessary changes and files the final offer document with Sebi, Registrar of Companies (ROC) and stock exchanges. After reviewing the DRHP, the market regulator gives its observations which need to be implemented by the company. Once the observations are implemented, it gets final approval & the document then becomes RHP (Red Herring Prospectus).

How is DRHP useful to investors?


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DRHP provides all the necessary information an investor ought to know about the company in order to make an informed decision. It contains details about the company, its promoters, the project, financial details, objects of raising the money, terms of the issue, risks involved with investing, use of proceeds from the offering, among others. However, the document does not provide information about the price or size of the offering.

ANCHOR INVESTORS

An Anchor Investor is the first investor in any round, that provides subsequent investors a degree of confidence. Until you have the first investor, no body wants to be the first one to take a bite. Once you have the first investors, others feel assurance that others are willing to invest. So typically an anchor investor will know you and have a high degree of confidence in your project. The anchor Investor may even have invested in other projects with you.

The concept of anchor investors came up in June this year following a directive by SEBI. Put briefly, anchor investors are entities which are offered, and subscribed to, shares in an IPO before the offer opens to the public.

Anchor investors belong to the Qualified Institutional Buyers (QIBs) category, which include mutual funds, foreign institutional investors, banks, and venture capital funds - domestic and international provident and pension funds.These entities are deemed to be in a better position than regular investors to judge the fundamentals and prospects of a company.Any new public offer of shares is split into sections, each of which is allocated to an investor group such as retail , non-institutional and so on. QIBs form the third investor group.A company can carve out a maximum of 30 per cent of the QIB section and offer it to anchor investors. In terms of money, the minimum application size for each anchor should be Rs 10 crore.

Anchor investors also have to make available a margin of 25 per cent of their application and part with the balance within two days from the close of the issue. An anchor investor will apply for these shares like a regular investor, at the prices it deems is the best fit. The offer for these investors opens - and closes - on the day before the whole issue is open to the public. Once the entire issue, that is, to the public as well, is over and the issue price fixed according to the book-building process, anchor investors have to make up the difference if their price is lower than what has been fixed. But should their price be above the fixed issue price, they have to forgo their cash.

As for the allocation among the anchor investors, while it is left to the company to decide it has to make sure that, for an issue size of up to Rs 250 crore, there are at least two investors


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and for issues bigger than that there are at least five. The details of anchor investments have to be made public before the issue opens.

Lead Managers

Lead managers are independent financial institutions appointed by the company going public to manage the IPO. They are the main body responsible for most of the IPO processing. Companies planning for IPO (also known as Issuer Company) first approaches or appoint lead managers. Lead managers examine company documents including financial documents, documents relating to litigation like commercial disputes, patent disputes, disputes with collaborators, etc. and other materials, in connection with the finalization of the draft red herring prospectus for the IPO. Lead manages are responsible to write the Red Herring Prospectus (RHP) and get it approve by SEBI. SEBI contact lead managers for any irregularities or lapses in RHP and ask them to clarify, add or review certain sections of the document.

Lead managers certifies to SEBI that all the disclosers made in Draft Red Herring Prospectus are true, correct, adequate and comply with SEBI guidelines to help investors in making a well-informed decision. Issuer Company with the help of lead manager, appoints underwriters or syndicate members for the IPO. Lead managers are responsible for examining the worth of underwriters and there capabilities to buy the shares and assure the same to SEBI.

In brief Lead Manager’s responsibilities include, initiate the IPO processing, write draft herring prospectus and get it approve by SEBI, help company in selling the IPO Shares and road shows, help company in finalize the issue price, issue opening & closing dates, listing date etc. Lead Manager’s are also known as Book Running Lead Manager and Co-Book Running Lead Managers. Issuer Company can appoint more then one lead manager to manage big IPO's i.e. Reliance Power IPO came in Jan 2008 had 10 Book Running Lead Managers.

Some of the popular lead managers in India Financial Market are:

DSP Merrill Lynch Ltd, ICICI Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd, J P Morgan India Pvt Ltd, JM Financial Consultants Pvt Ltd, Kotak Mahindra Capital Company Ltd, Macquarie India Advisory Services Pvt Ltd, SBI Capital Markets Ltd, UBS Securities India Pvt Ltd etc.


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IPO Registrar

IPO Registrars are independent financial institutions registered with stock exchanges and appointed by the company going public for mainly to keep record of the issue and ownership of company shares.

Responsibility of a registrar at the time of IPO involves, processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds and transfer allocated shares to investors demat accounts.

Investors can contact the Registrar to the Issue in case of any pre-Issue or post-Issue related problems such as non-receipt of letters of allotment, credit of allotted shares in the respective beneficiary accounts, refund orders etc.

Investor should provide following detail to the registrar for quick resolution of quires:

The full name of the sole or First Bidder, Bid cum Application Form number, Bidders Depository Account Details, number of Equity Shares applied for, date of bid form, name and address of the member of the Syndicate where the Bid was submitted and cheque or draft number and issuing bank thereof.

Name and contact information of IPO registrar is published in the IPO forms, Issue prospectus ect.

Some of the popular IPO Registrars in India Financial Market are:

1. Link Intime India Private Limited - IPO Registrar

2. Karvy Computershare Private Limited - IPO Registrar

3. Bigshare Services Pvt. Ltd - IPO Registrar

4. Cameo Corporate Services Limited - IPO Registrar

5. Enam Securities Private Limited - IPO Registrar

6. Aarthi Consultansts Pvt Ltd. - IPO Registrar

7. Ankit Consultancy Private Limited - IPO Registrar

8. Mondkar Computers Private Limited - IPO Registrar


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9. India Infoline Limited - IPO Lead Manager

10. Hem Securities Ltd - IPO Lead Manager

Syndicate Members

Syndicate members are commercial or investment banks responsible for underwriting IPO's. Syndicate members are usually registered with SEBI or registered as brokers with BSE / NSE Stock Exchanges.

They work as intermediaries for Issuer Company and the buyers of the IPO stocks. Investors submit their bids for IPO shares through Syndicate Members appointed by the Issuer Company. They are also known as 'The Members of the Syndicate'.

The Members of the Syndicate circulate copies of the Red Herring Prospectus along with the bid cum application form to potential investors. They are also responsible for accepting the bids, payments and application forms for the public issue.

After receiving the bid for IPO Shares from an investor, Syndicate Member enters bidding detail into the electronic bidding system and generates a Transaction Registration Slip ("TRS") for each price and demand option and give the same to the bidder.

The Bidder can make the revision to the bid any number of times during the Bidding Period. However, for any revision(s) in the Bid, the Bidders should use the services of the same member of the Syndicate through whom he or she had placed the original Bid.

At the time of registering each Bid, the members of the Syndicate enters the following details of the investor in the on-line system:

Name of the investor. Investor Category – Individual, Corporate, NRI, FII, or Mutual Fund etc. Numbers of Equity Shares bid for. Bid Amount. Bid cum Application Form number. Whether Margin Amount has been paid upon submission of Bid cum Application

Form. Depository Participant Identification Number and Client Identification Number of the

beneficiary account of the Bidder.

The Members of Syndicate deposit all the money received from investors to the Escrow Account opened by the Issuer Company. The Bid cum Application Form along with other supporting documents are then send to the registrar of the issue for further processing.


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IPO PRICING


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IPO PRICING

Mr. D.R Mehta, former chairman of SEBI once said “a study conducted on the ipo market in the US showed that of the 4,222 companies that had IPOs from 1,jan 1998.32.8 % were delisted, 35% were traded below their offer price and 31.66% traded above there offer price.” Pricing a public offer issue is thus an enigma even in mature capital markets.

The securities and exchange board of India (SEBI) introduced free pricing of shares for public offerings in 1992. As per the current SEBI disclosures and investor protection guidelines 2000(DIP guidelines) .Every company either unlisted or listed, which is eligible to make a public issue can freely price its share.

Pricing is one of the most important challenges for a merchant banker in public offering. Appropriate issue price cannot only ensure success of the issue but provide good returns to the prospective investors as well. This would build an investor friendly image for the company and make it a market favourite so that the company can come back to the primary market with subsequent issues from time to time. Therefore, proper issue pricing is a sensitive and the investor as well.

Notwithstanding the above , pricing is a sensitive issue and merchant banker has to carry the management of the company with him on the pricing. Over pricing a issue is an over kill that should be avoided even if it gives short term gains for the issuer and the merchant banker. At the same time the issue price should be providing suitable returns to the existing investors of the company who wish to make exit in the issue. Therefore , issue pricing is a tradeoff between immediate gains and long term returns to the issuing company and its promoters. The merchant banker has to weigh these expectations against market realities and decide the best pricing.

Pricing an issue therefore refers to setting the offer price. Before arriving at the pricing of the public offer, the lead manager and the underwriters have to understand the valuation of the company. Pricing an issue is done keeping in mind the qualitative features, and by using select multiples as benchmarks. The usual parameters used are the price to earnings ratio and price to book value ratio. The P/E ratio on the proposed offer price based on the earnings per share should correspond to industry P/E ratio currently existing in the market and leave room for the investors to make gains. Therefore, if the current industry average P/E of the pharmaceuticals is 10,and pre issue EPS of the company is 7.50 , the ideal P/E to be adopted would be about 6 times the EPS. i.e .rs 45 per share. Assuming that the share would list at a P/E of 8 , the opening price would be rs. 60 early sellers would make gains of around rs 5-10 before the selling pressure starts to bring price down. The price could ultimately settle between rs .45 and rs .50 in the first six to twelve months.


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Disclosure for basis of issue price.

Every issue, irrespective of its pricing has to be justified for the proposed pricing based on the requirements, of the DIP Guidelines. Under Schedule XV of the DIP guidelines, an illustrative method has been furnished for companies to disclose the basis for the issue price, which is reproduced below.

Basis for Issue Price

1. Adjusted EPS for last 3 years.2. P/E ratio in relation to issue price: based on year 3 eps and industry P/E

highest industry eps, lowest industry eps, average industry eps.3. Return on networth for last three years.4. Minimum return on total networth after the issue .5. Net asset value.

In the case of issues made in the book-building route, the disclosure mentioned at (4) above need not be made and the disclosure at (5) above should be furnished only as at the end of the last balance sheet. This is because, in the case of book built issues, the issue pricing is not decided beforehand and therefore the basis of the offer price related to the proposed offer price cannot be computed. In addition to the above disclosure, the following points have to be kept in mind.

Projected earnings of the company cannot be used as a justification for the issue price in the offer document.

The accounting ratios disclosed as above in support of the issue price shall be calculated after giving effect to the consequent increase in capital on account of compulsory conversions outstanding, as well as on the assumption that the options outstanding if any, to subscribe for additional capital shall be exercised.

Comparison of all the accounting ratios of the issuer company as mentioned above has to be made with the industry average and with the accounting ratios of the peer group (i.e. companies of comparable size in the same industry). The source from which the industry average and accounting ratios of peer group have been taken has to be furnished.

One of the key challenges in IPO pricing is to arrive at the future potential trading price band of the company’s share in the short term post-listing. Since the market conditions are unpredictable, it would not be possible to forecast too much into the future. Nevertheless, going by the prevailing market conditions at the time of the issue, it would be possible to arrive at price benchmarks that would prove useful in fixing the price band for the issue. As the objective is to find out a reasonable price band, one has to decide on a conservative


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pricing at the lower end, and an aggressive pricing on the upper end. As this is purely a quantifying effort of the company’s fundamentals, it need not be reflective of the primary market sentiments. After arriving at this price band, the upward or downward bias can be determined based on the market conditions.

Estimated share issue pricing of npcil

RS ( in crore) Rs (in crore)Share capital 10145 10145Res 12840 12840Net worth 22985 22985 114925 114925 As per 25%

dilutionAs per 10% dilution

Issue Size 28731.25 11492.5

Tangible assets 10718Pat 441 441No. of shares 101453327 101453327EPS 43.46826398 43.46826398Price band Base price 795.4692309 795.4692309Upper Cap 954.5630771 954.5630771

No of shares to be issuedIn CRORES As per 25% dilution As per 10%

dilutionIssue @ base price 36.1186189 14.44744756Issue at Upper cap 30.09884909 12.03953963

Company is eligible under 26 (1) of ICDR Regulation of SEBI,2009


Ipo Process

Documents

Transcript of Ipo Process